Lately, there has been a lot of talk, but not much action, about reforming California’s troubled public pension system. The California Public Employees Retirement System has come under fire for posting poor investment performance results. Further troubling is the new Governmental Accounting Standards Board Statement 68 rule requiring public agencies to post their unfunded pension liabilities to their balance sheets. Civic Openness in Negotiations transparency ordinances adopted by many cities like Huntington Beach have added to make the public aware of the financial challenges we face. These challenges are not always caused by us locally.

Pension reform ideas have included converting from defined benefit to defined contribution plans. This means exiting CalPERS and moving into a 401(k), just like most of the private sector. For municipalities like Huntington Beach, we are contractually bound to CalPERS and to exit CalPERS would require paying out all retirement obligations to make CalPERS pensions whole. Then, a switch to a 401(k) could be made. The downside is that it would cost the city of Huntington Beach just over $1 billion.

City councils and county supervisors are charged with contractual negotiations for salary and benefit increases between the municipalities they serve and the public employee unions. These negotiations usually take place between professional labor negotiators following the direction of your local elected representatives. Negotiations are oftentimes contentious and protracted as both sides see each other in less than a favorable light. Simply put, labor wants more and municipalities have less to offer.

For the city of Huntington Beach, we have less to offer as we are contractually obligated to make up for the lower than expected returns from CalPERS investments. At our May 1, 2017 mid year budget update for fiscal year 2016/2017, we learned that this additional shortage is estimated at between $4.5 million and $6 million per year.

Why are the taxpayers of Huntington Beach being saddled with a budget spending reduction of 2.7 percent? In my opinion, it’s in part due to CalPERS investment policies. Their Investment Advisory Board has embraced an investment policy titled ESG. Environmental, Social, Governance integration. This policy seeks to make investments, on behalf of their members, not based upon investment returns, but instead based upon the pursuit of social justice. Social justice includes carbon footprint reduction, diversity, wage equality, etc. All of which are admirable objectives but should not be the drivers of maximizing members’ returns on investments. The difference between the historical lower return from their current investment policy vs. alternate policies falls on the backs of the taxpayers.

CalPERS divested from tobacco stocks about 12 years ago. This divestment, by their admission, cost the fund about $3 billion. That loss represents about 1 percent of the fund value but $3 billion is still three thousand million dollars. Additional divestures from firearms, (formerly) apartheid South Africa, Iran and others cost the fund almost $8 billion. The fund grew only from about $170 billion to just over $300 billion during the same period that the Dow ballooned from about 6,400 to just over 21,000. If the fund had chartered the same path as the Dow Industrials, the fund would be valued at or near $540 billion rather than just over $300 billion.

CalPERS enjoys the luxury of embarking on investments that mirror social justice values as the shortages of the returns earned are made up by the member municipalities.

As CalPERS CEO Marci Frost reports on CalPERS’ own website, “Financial experts have warned us to expect a lower rate of return on our investment portfolio over the next decade, so the board decided to gradually lower the discount rate from 7.5 percent to 7 percent over the next three years. This was a wise move by the board. It brings more cash into the fund as we move toward our goal of fully funding the pension benefits that have been promised. The action does put real pressure on our employer partners, the 3,000 public agencies, schools, special districts, and the state of California that contract with us to offer you a pension. They will have to contribute more.”

Meaningful pension reform must begin with CalPERS membership holding their investment advisory board accountable. We are in the midst of an economic renaissance unlike any we have seen in decades and must capitalize on it. The opportunity to restore solvency to the fund begins with restoring sound investment strategies prioritizing the growth of members pension values.

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